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  #511  
Old 02-20-2018, 01:55 PM
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Mary Pat Campbell
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CONNECTICUT

https://www.ai-cio.com/in-focus/shop...bond-covenant/

Quote:
CT Treasurer, Governor at Odds on Breaking Bond Covenant
The Teachers' Retirement System Viability Commission explores options.
Spoiler:
With a looming $13 billion debt payment coming due for the 55.97% funded Teachers’ Retirement System (TRS) pension plan, the Connecticut governor and treasurer are at odds. After Connecticut’s credit rating was downgraded four times last year, Treasurer Denise Nappier is emphasizing the covenant on the bond should not be broken. But Gov. Dannel Malloy and actuaries say the payments may be just too high for the cash-strapped state.

When the state decided to catch up on payments with a bond, the covenant to the bond required the Actuarially Determined Employer Contribution (ADEC) be paid for the life of the bond. It was a 25-year bond from 2007 and the pay-off date is 2032.

There are two options: Malloy wants to make TRS more like a state plan and reduce the assumed rate of return from 8% to 6.9% to align with capital market future assumptions, and then re-amortize the liability over a longer period of time. But just the change in the amortizing is a violation in the bond covenant. Facing an overall state budget shortfall of $244.6 million, Malloy is also proposing requiring towns to contribute to the TRS.

Meanwhile, Nappier is against violating the bond covenant and against re-amortization, fearing reputational damage will effect rates in the future when the state wants to borrow.

“The biggest issue that we always have is reputational risk—that sometimes causes the markets to go up and down,” Nappier told the viability board, “When you’re dealing with sophisticated investors and they look at a breach in the bond covenant, then every indenture agreement from here on is going to be suspect. And that causes the rates to go up, significantly.”

She is scheduling to go to the bond market at least three or four times in 2018. “The next time I go to the bond market, I’ll get hit,” she said. “You’d be surprised at how emotional the market is.”

In May, Fitch Ratings downgraded the state from AA- to A+, citing “reduced expectations for economic and revenue performance over the medium term” following a decline in personal income tax. In the same month, Moody’s reported Connecticut has the highest debt service costs of the 50 US states, although it declined to 13.3% from 14.3% in the previous year. Its net-tax supported debt (NTSD) is $6,505 compared to the median per capita of $1,006.

Nappier suggests waiting until 2025 to make any changes, pay out the bonds then, and move forward from there.

“There is money,” she told CIO. “It’s what bills are you going to pay, and I am saying you’ve got to pay this one. They need to pay this bill. It’s the bill that goes back to the 1940s.”

But the state is saying it can’t possibly pay the whole tab.

How it Happened
The plan’s first problems arose in 1939, when plan promises were made but not funded for both the state employees’ plan and TRS until the 1970s. “TRS has always used the less effective level-percent-of-payroll approach to calculate amortization payments. Additionally, a lax statutory funding schedule allowed TRS to underpay until 1992,” according to a 2015 report by the Center for Retirement Research at Boston College, commissioned by Connecticut.

The underfunding was partially corrected through a bond issuance in 2008, which had covenants mandating the plan’s unfunded actuarial accrued liability (UAAL) had to be fully funded by 2032, but shortly after the ink was dry on the agreement, the plan was battered, losing 17.3% in the financial crisis.

Last year, despite the teachers’ contribution rate increasing 1%, the pension’s funding levels still dropped from 59% to 55.97% with $13.1 billion in unfunded liabilities. The UAAL grew by $1.776 billion due to interest and decreased by $1.654 billion due to the amortization payments over the two-year period, according to the November 2017 Connecticut State Teachers’ Retirement System Actuarial Valuation.

What’s Next
About two months ago, The Teachers’ Retirement System Viability Commission was created by the state to explore the issue. The actuaries were hired, and a public hearing was scheduled but postponed due to an ice storm.

Yet on Feb. 7, (during the ice storm,) the viability board meeting was still held to allow the actuaries (who had traveled from Atlanta, Georgia) to fine tune their analysis before presenting their recommendations in late February.

Benchmarking Challenges
In benchmarking, the actuaries had their challenges, with a limited number of plans in which they could use for comparison. Since plan provisions varied, according to the actuaries, “they were not clean comparisons.” Since they could not change the benefits of the plan participants, the actuaries compared the plan against the latest tiers of benefits for other retirement systems, which, in some cases, provided fewer benefits or later retirement eligibility. The benchmarking was also limited to plans that were not covered by Social Security, which only left about a dozen plans to compare against.

Moving the Needle
In crunching their numbers and forming their projections, the actuaries found that if they changed benefits for future members, it didn’t “move the needle” enough to make a difference to the debt. It takes time, “decades,” to show a noticeable effect, they said. And the new hires are not going to contribute to the $13 billion liability. “There’s no unfunded liability on someone you hire tomorrow,” said actuary John Garrett of Cavanaugh MacDonald Consulting. Market-driven asset losses and low contributions contribute to the liability the most. Shifting from a five-year vesting plan to a 10-year one also had little effect. Teachers have one of the longest careers, at 35 years, with few enhanced benefits, and so, pulling back benefits also wasn’t applicable.

How Realistic Is It?
When modeling the plan, the actuaries said they found unrealistic expectations for the plan. In valuing the liabilities and cash flow, they used the current funding policy that the statutes mandate, including the amortization periods and the 8% rate of return assumption in the plan. When modeling the impact of investment volatility on the funding metrics, the actuaries used the treasurer’s office return expectations of a 7% geometric mean and a standard deviation of 11%, which is about the average for plans around the country.

“What that means is two-thirds of the time, we’re expecting standard returns between 18% on the high side, down to -4% on the low side,” said Garrett, which has historically been the plan’s norm. “If you follow the track up, with that assumption of 7% returns, we end up at a point where the required contributions are going to increase beyond a realistic amount of money that we can consider the state would put into the plan. There has to be a reality,” said Garrett.

The unrealistic expectations would include a contribution of up to 8% of the total revenue of the state. In a bad market environment, it would require the state put $4 billion into the plan.

“We’re going to hit a point in time between 2020 and 2032 that the challenge to the state of coming up with the full [amount] is likely to be more than they can afford,” said Garrett, and the plan is unlikely to be 100% funded.

The plan’s current amortization policy, where all is paid off by 2032, has a 70% likelihood of being breached by the constrained contribution, said actuary Larry Langer. He noted that now that plans have more equity exposure, actuaries are currently promoting the idea of layered amortization over longer periods of time, such as 15 years, to reduce volatility and so that contributions don’t need to spike after years of low performance. But the bond covenant likely won’t allow for changes in the contribution policies, he said.

The actuaries noted that despite the challenges in paying off the $13 billion past debt, the plan is still predicted to be solvent throughout a 50-year projection period, even through worst-case scenarios with constrained contributions.

Yet Nappier says violating the covenant is a big risk, not only to the state’s credit rating, but to the plan. If the covenants had not been in place, she emphasized, the plan would never have been funded. “They never had before,” she said. Also, the bond program was successful: the state has paid less in debt than it has earned in bond proceeds, which are up at least $142 million. “But it’s not about the debt, it’s about the discipline,” she said. Yet in keeping with either a 7% an 8% assumed rate of return, with the state making required contributions, the plan would still only be 48% likely to be 70% funded by 2025, according to actuarial projections. “That’s a little bit less than half likely that we’re going to get there,” said Garrett, who will return with his recommendations on Feb. 26.


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  #512  
Old 02-24-2018, 02:22 PM
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Mary Pat Campbell
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https://www.bondbuyer.com/news/munic...-supreme-court

Quote:
Supreme Court arguments in union fee case have municipal credit implications

Spoiler:
CHICAGO -- The power of public employee unions to influence elections and government policies on contracts, salaries, and pension benefits in many states is at stake in a case being argued before the U.S. Supreme Court Monday.

The case, Janus v. American Federation of State, County, and Municipal Employees Council 31, originated in Illinois. Unions, elected officials, and municipal market participants are all watching closely at it stands to impact government finances.

The court is being asked to declare so-called public “agency” or “fair-share” fees unconstitutional violations of the First Amendment. Many expect the court’s right-leaning majority to lift the rules requiring public-sector employees who aren't members of a union to pay compulsory fees to the union. They would do so by overturning the Supreme Court's 1977 Abood v. Detroit Board of Education ruling that upheld the practice.

The American flag flies next to the U.S. Supreme Court in Washington, D.C.
The U.S. Supreme Court hears arguments Monday in a union dues case with municipal credit implications.
Bloomberg News
If the court ends the fees, the shift could have far-reaching consequences by altering labor’s clout in states that lack “right-to-work” statutes that prohibit unions from requiring membership or dues as a condition of employment.

The decision stands to affect 5 million public workers across 22 states including California, Illinois, and New York. Missouri last year became the 28th state to pass such a "right-to-work" law but it has yet to take effect due to a petition drive that led to placement of the question on the November ballot.

If the court sides with Illinois state employee Mark Janus, local and state governments could gain the upper hand in negotiations, allowing them to trim labor costs. The theory is that public employee unions, with less money coming in from dues or agency fees, would have less money to spend on supportive politicians, reducing their clout in state capitals and with local governments.

“The first impact on the municipal market is it provides more latitude in public sector expenditures,” Philip Fischer, head of municipal bond research at Bank of America Merrill Lynch, said in an interview along with fellow municipal strategist Ian Rogow.

“The changing of the political relationship between the union members and their employees can be expected to alter the economic situation in the state by reducing state costs over the long term, and by shifting public attitudes,” Fischer added. “Over the long term how that plays out will be an interesting dynamic to watch," he said.

“Our expectation is if the court does rule as expected, it will provide a pretty good tailwind to the municipal market vis-a-vis a rebalanced employee-employer relationship,” Rogow said.

“The question is, ‘Is it a credit positive?’ For some it would be, not necessarily for all,” Fischer added. If the court overrules Abood, investors who hold bonds from states where labor costs run high should expect credit quality to improve and in turn the value of their holdings

The larger impact on political dynamics may take time to play out, especially in states that will continue to adhere to policies that favor labor, but if the fees are overturned expect a steady erosion of union clout, Fischer and Rogow said.

Effects might be noticeable sooner in states that move to rein in labor and pension costs where strong legal protections are not in place or pressure is high to preserve benefits. “When the music stops, so does the dancing,” Fischer said.

Reports from Fischer and Rogow cite the swift consequences of Wisconsin Gov. Scott Walker’s Act 10 that limited collective bargaining rights, allowed for contracts to be renegotiated, and put some limits on union fee collections in 2011. Median compensation for teachers soon decreased by 8.2% and median salaries have continued to fall, as have union membership levels.

Of the roughly 10.42 million public employees in the 28 states with right-to-work laws, 18.8% are members of public unions. In non-right-to-work states where unions have a stronger hand, about 50% of 5.15 million are union members.

Anti-union right-to-work states have a median pension funding ratio of 72.4%, while non-right-to-work states are at 62.6% based on fiscal 2016 data.

Right-to-work states' median debt, pension and other post-employment benefit liabilities as a percentage of gross state product was 4.65% while it’s 10.75% for non-right-to-work states, according to Bank of America Merrill Lynch reports.

At least 40 amicus briefs have been filed with the court from unions, local and state governments, Democratic and Republican groups, civic organizations, religious groups, and constitutional scholars.

The U.S. solicitor general is participating in oral arguments in support of Janus. In two prior cases that posed similar union due arguments, the federal government under President Obama supported the union position.

ILLINOIS

In their support for overruling Abood, several briefs from private organizations and Republican lawyers argue that collective bargaining played a key role driving the public pension funding crisis, local and state fiscal woes, and contributed to Chapter 9 bankruptcy filings in Detroit, Stockton, Calif. and San Bernardino, Calif. Union fees, they argue, supported labor to the detriment of government finances.

“AFSCME’s collective bargaining in Illinois has proven quite successful in obtaining concessions that Illinois taxpayers cannot sustain,” says an amicus brief filed by Illinois Gov. Bruce Rauner’s former general counsel, Jason Barclay, and former Illinois Gov. Jim Edgar attorney James Montana. Rauner, who initiated the Janus case, and Edgar are Republicans.

“Because it facilitates the financial destruction of states like Illinois while violating employee rights in three different ways,” the two lawyers urge the court to overturn Abood. Illinois is carrying a $129 billion unfunded pension liability and is the lowest rated state with two of its ratings at the lowest investment grade.

The National Conference on Public Employee Retirement Systems, which represents 500 funds across the country, defended Abood.

“Neither public-sector collective bargaining nor fair-share laws are responsible for the present financial situation state and local governments or their pension systems face,” the group’s brief says. “The insinuation that public employees or their unions are the cause of these problems is baseless,” and the argument “obscures genuine issues that should be addressed, such as some plans’ lack of fiscal discipline and the failure to make regular actuarially determined contributions.

“It is also disingenuous …to claim that public-sector collective bargaining has an outsized effect on a state’s budget and is therefore a burden on public entities’ financial health. Perhaps most directly, municipal bond credit ratings demonstrate that this is not the case,” the filing says.

The group contends an analysis of municipal credit ratings found that allowing public employees to collectively bargain and charge non-members for the cost associated with union representation had no negative effect on the creditworthiness of issuers.

The group also cites fiscal challenges in states like Kansas, which has had right-to-work laws on the books since 1958.

“In short, although no one factor alone caused Detroit’s financial collapse, it is clear that Detroit’s problems cannot be attributed to public pensions or collective bargaining,” the group writes, citing state aid cuts, bad borrowing practices, and a faltering tax base as reasons behind the city’s bankruptcy. The filing further accuses opposing briefs of cherry picking snippets from the California cities’ bankruptcy cases to paint a picture implying they were driven by collectively bargaining practices.

UNION CLOUT

“Prohibiting agency shop fees would strip jurisdictions like New York City of a tool that has for years helped foster productive relationships between governments and their public workforces,” New York City Corporation Counsel Zachary Carter said in a city statement announcing its filing of amicus brief supporting the fees.

A recent Empire Center for Public Policy report says New York government unions collected $862 million of dues and fees in 2016, which included $53 million that was automatically deducted from the paychecks of New York City and state employees who chose not to become union members. An estimated $50 million in additional agency fees came from workers in other local governments. The Manhattan Institute said it could take around five to 10 years before determining the union membership declines and the revenue impact to municipalities.

THE CASE

Janus v. AFSCME originated in a complaint brought by Rauner, Illinois' first-term Republican leader who has pursued what the General Assembly’s Democratic majorities have labeled an anti-union agenda.

Rauner argued the Illinois Public Relations Act requiring non-union members to pay limited “agency” or “fair share” fees to cover costs of collective bargaining and contract administration violates the First Amendment by compelling employees who don’t agree with union positions to contribute money to it.

The district court dismissed the governor as a member of the suit because he did not pay union dues and therefore lacked standing but the court allowed the suit to proceed based on the participation of several other state employees, including Mark Janus who was not a member of the union and opposed paying the fee.

The district court and the Court of Appeals for the Seventh Circuit sided with the unions, concluding they were bound by the Abood decision. The plaintiffs petitioned the high court and it agreed last year to hear the case.

Janus argues that Abood was wrongly decided because issues negotiated by public-sector unions like salaries, pensions and benefits for government employees are inherently political and therefore even limited fair share and agency fees can be applied for political purposes.

“AFSCME and the state of Illinois have not shown and cannot show that unions’ desire to keep taking money out of government workers’ paychecks is more important than the workers’ fundamental First Amendment right to choose which advocacy groups they will and won't support,” Janus attorney Jacob Huebert, of the Liberty Justice Center, said in a recent statement.

Arguing in support of the Illinois law and against overturning Abood is the union and Illinois Attorney General Lisa Madigan. Department of Central Management Services acting director Michael Hoffman is also a respondent.

“Agency fees are justified by the state’s interest in dealing with a fairly and adequately funded exclusive representative. Both Congress and this Court have long recognized that exclusive representation contributes to stable and effective labor-management relations,” the Madigan brief says.

In the Abood case, the court found a public employer whose employees were represented by a union could require non-union employees to pay union fees because they benefited from the union’s collective bargaining agreement.

The fees could only be great enough to cover the cost of the union’s activities that benefited them and they could not be used for the expression of political views, on behalf of political candidates, or toward the advancement of other ideological causes.

While conservative-leaning Supreme Courts have been reluctant to overturn established legal precedent, Fischer and Rogow believe the writing is on the wall that Abood will be overruled. That’s because of both recent actions by the high court and societal dynamics.

At the time of the Abood decision, the nation faced great labor strife and achieving labor peace provided reasoning for the decision. Such strife has dramatically eased, they said.

The justices had also previously heard in 2014 another Illinois case – Harris v. Quinn -- that argued similar questions. The court found that the employees behind the case – home health aides – should not be required to pay the fees. Because the aides were not formally state employees, the justices issued only a narrow ruling and let Abood, which dealt with government employees, stand.

The majority opinion from five of the nine justices did, however, lay the groundwork for a future challenge to Abood in suggesting the 1977 decision rested on “questionable foundations.”

The court in 2016 heard a California case – Friedrichs v. California Teachers Association -- that many believed spelled the end to Abood, but Justice Antonin Scalia died before a decision was rendered and the court deadlocked, leaving the lower court decision in place.

The addition of conservative Justice Neil Gorsuch to the court last year tilts the decision toward overturning Abood, legal and market participants following the case say.

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  #513  
Old 02-28-2018, 06:54 AM
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Mary Pat Campbell
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CALIFORNIA

http://www.sacbee.com/opinion/califo...202263079.html

Quote:
Two red flags that California’s economy isn’t as healthy as we think

Spoiler:
Two recent financial tremors should caution California and its municipalities that they had better get their financial houses in order. The first came from Controller Betty Yee in her update on the state’s retiree health care liabilities.

On January 31, she reported “the state’s cost for retiree health and dental benefits” has grown to $92 billion, up from last year’s $77 billion.

THE STATE AND ITS COUNTIES AND CITIES NEED TO GET THEIR FINANCIAL CARDS IN A ROW. EVEN IF THE STOCK MARKET CONTINUES MOVING UP, A $290 BILLION UNFUNDED LIABILITY SIMPLY ISN’T SUSTAINABLE. AND IF THE MARKET CRASHES, AND STAYS CRASHED, THEN WHAT?

This is only the second year she has issued this report, following the standards issued by the Governmental Accounting Standards Board. But it was a $15 billion increase.


Let’s hope this spike is an anomaly and not a trend.

Yet Yee warned the liability “will be unpredictable and will remain a paramount fiscal challenge over the next three decades.”

This $92 billion becomes the second largest number in the state’s list of outstanding liabilities. Even larger, as Gov. Jerry Brown itemized in his January 10 budget proposal for fiscal year 2018-19, is the $176 billion owed for underfunded pensions.

Add in $3.28 billion for several lesser liabilities, such as loans from special funds, and $19.3 billion for University of California retirees’ health care, and the total comes to $290 billion. This means every man, woman and child in California owes $7,300 to pay this balance off.

The Brown budget proposes paying down only $1.5 billion of that. The rest is left to his successors to tackle.

The second tremor came on Feb. 5 with the massive stock market drop, the beginning of the worst week for investors since 2008.

Turbulence and volatility are now the concern. With some indicators showing inflation rising again, the New York Times reported a week and a half later that “nearly all mainstream economists agree that at some point, higher interest rates and inflation hurt stock prices.”

My purpose here is to simply reiterate that the state and its counties and cities need to get their financial cards in a row. Even if the stock market continues moving up, a $290 billion unfunded liability simply isn’t sustainable. And if the market crashes, and stays crashed, then what?

I’ve been here before. In 1994, I warned that Orange County’s cash investment strategy was unsustainable because of “interest rate risk.” I was running, but lost that June, against longtime county Treasurer-Tax Collector Bob Citron, whose Midas touch with investments seemed to be invincible – until it wasn’t.

“When Government Fails: The Orange County Bankruptcy,” published in 1998 by Mark Baldassare, president and CEO of the Public Policy Institute of California, recounted what happened. He cited a May 31, 1994 letter I sent to then-Supervisor Tom Riley, warning that the fund had lost $1.2 billion since interest rates started rising in February 1994.

Baldassare explained how I explained Citron’s approach would work “only if there were declining interest rates over several years, which was impossible to predict” – a situation eerily similar to 2018. Riley “dismissed” the warning based on the advice of “financial experts.”

Orange County filed for Chapter 9 bankruptcy protection that December in what then was the largest municipal bankruptcy in American history, with losses totaling $1.6 billion. In addition to Baldassare’s, dozens of books have been written quoting my warnings as a cautionary tale for today’s fiscal stewards.

What people do with their own money is their business. What government officials do with the people’s money is everybody’s business.

Elected officials need to encourage an emphasis on building cash reserves, cutting fluff and focusing on debt management, before their debts define who manages their municipalities.


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Old 03-05-2018, 02:18 PM
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CONNECTICUT

draft report of the Commission on Fiscal Stability and Economic Growth,
March 1, 2018

http://crcog.org/wp-content/uploads/...port-DRAFT.pdf

Quote:
While we knew upon undertaking this work that the state faced considerable problems, we now understand
that they are even deeper and more urgent than we knew. There is still a solid foundation and much that is
attractive about Connecticut, but we have deeply embedded budget imbalances, unfunded liabilities that
exceed $100 billion if properly computed, fat economic growth in contrast to gains in states around us, and
declining population in key demographic segments. The good news is that the situation is fxable if we take
bold action. We are optimistic about the future, but only if our governmental leaders and the entire General
Assembly share our assessment of the situation and are willing to take immediate action.

We are presenting you with a bold “Plan for Connecticut” that we believe is comprehensive and balanced. It will
get us on the road to recovery, both in terms of budget stability and economic growth. Notwithstanding the
abbreviated session this year, we believe that you have ample time to consider and enact the key elements of
this plan. We must emphasize the conditional linkage among the Commission’s recommendations.

Speaking for all the members of the Commission, we are grateful for having had this opportunity to serve our
cherished state, and we stand ready to testify and cooperate further in any way that would be useful.

.....
Spoiler:
EXECUTIVE SUMMARY
PA 17-2 at Sec. 250 established a Commission on Fiscal Stability and Economic Growth to
develop and recommend policies to achieve state government fiscal stability and promote
economic growth and competitiveness within the state. The 14 private citizens appointed to the
Commission present these recommendations based on a sober recognition that Connecticut is in
quiet crisis by every measure: consistent budget imbalances, growing unfunded liabilities, falling
bond ratings, stagnant economic growth, competitive disadvantages compared to neighboring
states on most important indices, and increasing outmigration.
The legislature must act, and we believe it wants to do so. The legislature needs a plan, and we
are presenting one that we believe can appeal to all segments and build a stronger and more
prosperous future for Connecticut. Through our hearings and many conversations across the
state, we believe there will be support for this plan. The time to act is now.
KEY FINDINGS:
• While neighboring states and the United States as a whole have economies that
are growing, our economy is shrinking—it is actually smaller than it was in 2004;
• We are losing ground on numerous key measures of competitiveness: tax
climate, business climate, transportation quality, vitality of cities, and more;
• We are facing ongoing budget deficits of $2 billion - $3 billion in FY 2020 and
beyond, growing by $500 million per year.
State government’s fiscal instability is itself a root cause of our poor economic growth because
it leads to a lack of confidence by the business community and among state residents. Reigniting
economic growth requires Connecticut to regain fiscal stability. The Commission’s
recommendations offer a roadmap for legislative action starting this session. This plan will not
improve the situation overnight, but it does put Connecticut on a sustainable path.

KEY RECOMMENDATIONS
In this report, the Commission will propose ten major recommendations:
1. Enact a revenue neutral rebalancing of state taxes (which becomes revenue positive
when coupled with economic growth) that reduces income taxes in every bracket,
selectively raises taxes on business, raises the sales tax rate by less than 1%, cuts
exemptions and exclusions from all taxes by 14%, and eliminates the dwindling estate
and gift taxes.
2. Raise the gas tax to fund transportation projects and produce a plan for eventual
implementation of electronic tolls.
3. Create a Joint Budget Committee of the legislature with the power to set limits on
revenues and expenses.
4. Have the legislature assume the responsibility to define state employee fringe benefits
by removing them from collective bargaining for new contracts.
5. Amend binding arbitration laws to permit award of compromise outcomes.
6. Develop and implement a plan to cut $1 billion out of annual operating expenses.
7. Reform the Teachers’ Retirement System to lower costs and to make it sustainable by
paying down unfunded liabilities.
8. Reinvest in transportation and cities, and build a major new STEM campus in one city
in partnership with a major research university.
9. Undertake a series of growth initiatives, led by the executive branch, with the funding
and support from the legislature to (1) develop and retain the workforce Connecticut
needs, (2) support the growth of Connecticut’s highest-potential economic sectors and
(3) transform the business environment for entrepreneurship and innovation.
10. Diversify municipal revenue streams beyond the regressive property tax and stimulate
regional service delivery.
The Commission also proposes linkage in the phasing of several of these proposals to ensure
balance across all sectors for the above recommendations.
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Old 03-05-2018, 02:31 PM
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https://pro.creditwritedowns.com/201...l#.Wp1qBejwaUl

Quote:
How QE using municipal bonds happens in the next recession
Spoiler:
I’m worried. I know this sounds strange. After all, we are in arguably the best growth phase in this economic cycle. And very few economists are predicting, let alone talking about, recession. I don’t see recession around the corner either. But, still, I am concerned. And my worry is about a recession and public pension crisis. I am even talking about the Fed buying up municipal bonds using quantitative easing. That was my last post.

Since I have put this out there so early, let’s talk about how the Fed actually does it. I mean, we are still a long way from recession or crisis. So think of this post as an OJ-style “If I did It” piece, with me ghostwriting for the Fed.

The most dangerous part of the business cycle
Here’s the danger. We have people talking about a bear market in bonds. Other people are talking about a meltdown in equities. The latest talk is of a trade war — with Donald Trump in the Herbert Hoover role. A lot of this is probably hyperbole, hype, doom and gloom.

But, still, we could be one major policy error away from a big financial crisis. If you believe the public statements of Dalio, Gross, Grantham Gundlach and many of the other market pundits, we are past a point of no return in financial markets. Eventually, this will end badly — at least, that’s the inference.

The trigger, you ask? We have a regime shift at the Fed right now, at the most dangerous point in this business cycle. And my own view here is that, if the Fed is as hawkish as Powell makes it seem, then this is what triggers a recession and crisis. Expansions don’t die in their beds of old age, they are murdered by the Federal Reserve.

In the past, I have said the Fed gets it. I know the Yellen Fed did. Just last year, they paused as the data deteriorated. And they certainly got the policy during the shale oil bust right. But we have a new sherif in town. And his tone is quite a bit different. Just maybe, the Fed will keep hiking until the market cries uncle. And then that’s when Dalio and Grantham and that lot will be proved right.

Muni Crisis postponed, not averted
So that gets us back to 2010. The municipal finance crisis that Meredith Whitney predicted some eight years ago never came to pass. And I said at the time, barring a double dip recession, it wouldn’t happen. You need an economic trigger to get the hundreds of billions of dollars of defaults that create a crisis. And you simply don’t have a trigger in an economic upswing.

The Fed could give us this trigger. And then what? The last post I wrote was thin on details surrounding the Fed’s flexibility in buying municipal bonds. But what I do know is that the Federal Reserve is prohibited for buying municipal bonds of maturities longer than six months. That’s not very helpful in a crisis.

Nevertheless, there are ways around this. First, back in 2012, three Stanford Law Professors wrote a piece in the New York Times urging a change in that law so that the Fed could buy municipal bonds instead of mortgage bonds. They argued “State and municipal bonds help finance new infrastructure projects like roads and bridges, as well as pay for some government salaries and services, by borrowing against future tax receipts.”

Their proposal never saw a robust defense in Congress.

QE for municipal bonds using the Fed’s emergency lending powers
But later, crisis Federal Reserve Chair Ben Bernanke revealed in his memoirs, the Fed considering buying municipal paper during the crisis.

Bernanke memoir re munis pic.twitter.com/hFTXWPoG74

— Sam Bell (@sam_a_bell) July 12, 2017

The real question is how to get around the six-month muni maturity rule. As Marshall Auerback reminded me today, the Federal Reserve Bank of New York agreed to lend JPMorgan Chase $29 billion to acquire Bear Stearns ten years ago. And the legal authority they used was Section 13(3) of the Federal Reserve Act. As Marshall put it: “That section seems to grant considerable wriggle room.”

The Fed has already said exactly this. In a press release dated 21 May 2015, the Fed says:

The Federal Reserve Board on Thursday proposed adding certain general obligation state and municipal bonds to the range of assets a banking organization may use to satisfy regulatory requirements designed to ensure that large banking organizations have the capacity to meet their liquidity needs during a period of financial stress.

Under the Liquidity Coverage Ratio (LCR) requirement adopted by the federal banking agencies last September, large banking organizations are required to hold high-quality liquid assets (HQLA) that can be easily and quickly converted into cash within 30 days during a period of financial stress. Subsequent study by the Federal Reserve suggests that certain general obligation U.S. state and municipal bonds should qualify under the LCR as HQLA because they have liquidity characteristics sufficiently similar to investment grade corporate bonds and other HQLA asset classes.

The proposed rule would allow investment grade, general obligation U.S. state and municipal bonds to be counted as HQLA up to certain levels if they meet the same liquidity criteria that currently apply to corporate debt securities. The limits on the amount of a state or municipality’s bonds that could qualify are based on the specific liquidity characteristics of the bonds.

Change the rules
But, if need be, Congress could change the rules altogether. Roosevelt Institute Fellows Mike Konczal and J.W. Mason suggested just that in a November report.

Their view:

In the new report, the authors argue that it is essential for the Fed to further expand its scope and develop an even broader monetary policy toolkit than was employed during the Great Recession. They suggest six approaches they believe the Federal Reserve—and Congress—should adopt:

Setting long-term interest rates
Increasing support for public borrowing
Purchasing state and local debt
Coordinating Treasury and Federal Reserve policy
Purchasing a greater range of private debt
Shifting from a monetary policy to a credit policy framework
As this new paper discusses, the economy’s ability to weather recessions, and to meet basic human needs even in good times, depends on the Fed thinking more broadly about its role to manage the economy and weather economic crises.

QE for munis is coming
I have argued that monetary policy is at the end of the line using unconventional policy. Unconventional policy won’t get us to the Nirvana of higher growth and low inflation that the Trump Administration wants.

But, we are beyond that now because the Fed has successfully moved off the lower zero bound. It is even beginning to shrink its balance sheet. Other central banks may soon follow its lead.

Nevertheless, we aren’t that far from zero. In the next recession, we are very likely to go back to zero rates. And then the Fed will be in the same position it was before – out of bullets. If, as I anticipate, muni bonds are hit or local governments even begin to default on their obligations, the Fed will move in. Section 13(3) of the Federal Reserve Act gives them authority to do so. And if they need even more authority, Congress will grant it.


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Old 03-07-2018, 09:54 AM
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https://www.wsj.com/articles/megaban...ill-1520332201

Quote:
Big Banks Get a Big Win in Senate Rollback Bill
Nation’s largest banks would gain incentive to buy more municipal bonds in legislation targeting smaller banks
Spoiler:
WASHINGTON--Bipartisan legislation expected to clear the Senate as early as this week has just one provision that is set to directly benefit the nation's megabanks: a section aimed at making it easier for them to buy state and local bonds.

The provision, championed by Citigroup Inc. and other large banks, would ease a new rule aimed at ensuring banks can raise enough cash during a financial-market meltdown to fund their operations for 30 days, requiring them to hold more cash or securities that are easily salable.

Under federal banking rules approved in 2014, those "high quality liquid assets" included cash, Treasury bonds and corporate debt--but not municipal debt. Banks historically like to hold municipal bonds because of their safety and tax advantages.

The Senate on Tuesday voted 67-32 to formally begin debate on the bill, which primarily benefits small and medium-size banks , easily reaching the 60 votes needed and signaling that the measure has enough support from Democrats to pass by a comfortable margin. The legislation was backed by 16 Democrats and one independent, Maine Sen. Angus King, bucking Massachusetts Sen. Elizabeth Warren and 31 other Democrats who opposed the procedural vote.

Including the municipal-bond provision in the deregulatory bill was a priority for the nation's biggest banks that buy a lot of municipal securities as investments. A Citi lobbyist recently told a Senate staffer that the firm would be pleased if easing the treatment of municipal debt under the bank-funding rule was the one thing it could accomplish during the current Congress, according to a person familiar with the conversation.

State and local officials have praised the move, saying their securities could suffer if banks begin to shun them.

A Citi spokesman said the bond provision "is supported by a wide array of groups focused on helping cities and states address critical infrastructure needs."

While the provision is a victory for Citi, the biggest U.S. banks haven't lobbied extensively on the Senate bill, according to congressional aides. Big firms have spent billions to comply with a gamut of postcrisis rules and generally aren't eager to tear them down.

Analysts have said changing the rule for municipal products would be a mistake because it would erode the core of a bank-safety rule put in place after the 2010 Dodd-Frank law . While municipal securities have relatively low default rates, they are traded thinly and shouldn't count as liquid assets, critics say.

"It's an outrageously bad idea," said Phillip Swagel, a professor at the University of Maryland who served in the George W. Bush Treasury, characterizing the provision as an implicit federal guarantee of the municipal market. In the next crisis, banks will have trouble selling their municipal securities, freezing up the market for them and requiring the government to step in to backstop it, he predicted.

While lawmakers agreed to include the municipal debt measure, they rebuffed Citi and JPMorgan Chase & Co. efforts to water down a separate postcrisis capital requirement known as the supplementary leverage ratio. That regulation effectively restricts banks from making too many loans without adding new capital, forcing firms to maintain a proportion of capital to fund their assets--including loans, investments and even the collateral clients post on derivatives transactions.

The legislation includes a provision to diminish the leverage ratio in a way that lawmakers say would only benefit financial institutions primarily engaged in "custody services," in which they hold assets on behalf of other banks. Citi and JPMorgan, global banks that don't fit the definition but still offer custody services, have argued it is unfair to carve out certain banks from the provision and not others.

"As Congress has sought to make a common sense change to the way capital rules treat custody assets, we have asked that they apply that change to all custody banks to maintain a level playing field in this important business," a Citi spokesman said.

Senate aides said lawmakers crafted a delicate compromise that can pass the chamber and don't want to broaden the bill with more provisions helping big banks--which became a target of criticism during the crisis--and risk having the bill fail. "That is not happening," said one Senate Democratic aide.

Federal Reserve Chairman Jerome Powell said on Feb. 27 that the Fed would prefer that Congress allow regulators to rewrite the leverage ratio rule . Instead, the bill directs regulators to exclude certain assets from the calculation of the leverage ratio for custody banks such as Bank of New York Mellon Corp. and State Street Corp.


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Old 03-07-2018, 03:38 PM
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CONNECTICUT

https://ctviewpoints.org/2018/03/07/...fiscal-cancer/

Quote:
A way to cure Connecticut’s ‘fiscal cancer’
10 HOURS AGO

Spoiler:
The Fiscal Stability and Economic Growth Commission has issued its report. It recommends proposed net tax and toll increases, tax reform, aspirational but unspecified spending cuts, and no changes to the SEBAC agreement until 2027. Now that the report has been issued, it seems appropriate to compare it to my previously submitted recommendations.

Connecticut’s problem is fairly simple. Gov. Dan Malloy and his Democratic allies have raised taxes, increased regulation, adopted such an anti-business approach, and promised such generous retirement benefits to state workers that revenues are declining, recurring deficits are normal, and economic growth is anemic as Connecticut businesses and families flee the state. Connecticut faces large and growing structural budget deficits, mounting debt, huge unfunded retirement obligations, a deteriorating infrastructure, and an education and skills gap disparity, that traditional politicians either can not or will not address.

While Connecticut faces huge problems, they can be solved by a governor who is a proven problem solver and works with a supportive legislature that is ready to truly tackle our state’s problems. During my tenure as Comptroller General of the United States and head of the General Accounting Office, I worked with Congressional leaders and GAO staff to implement major reforms that dramatically transformed the agency and saved federal taxpayers about $380 billion. I have solved complex problems before in government and I can do it again in Connecticut. What do we need to do?

First, Connecticut businesses and individuals are overtaxed. Under my plan, some tax cuts will occur quickly in order to stop the exodus from our state. More and even bigger tax cuts can and will happen after we right-size state government, restructure state compensation/benefit programs, and reform the state’s welfare system.

Significant economic and job growth will only occur after we put the state’s finances in order. CEO’s, boards and sophisticated investors can read financial statements and understand budget debates. Connecticut’s financial statements and budget projections make it clear that our state has “fiscal cancer.” We can beat cancer but only if we recognize reality and begin to aggressively treat the root causes of the disease.

Second, Connecticut needs to strengthen its basic fiscal controls in order to get back on track and provide more effective fiscal discipline and certainty over time.

For example, the state should make it clear that borrowing can not be used to “balance” the state budget. The state spending cap should be based on “net state spending” and should include all pension and other retirement obligations. We should adopt a “No Budget: No Pay” policy for legislators in connection with the state budget. Finally, there should be serious sanctions for any diversion of “trust fund” assets (e.g., transportation trust fund) for undesignated purposes.

Third, Connecticut has lost control of its budget and faces large and growing structural deficits due, in large part, to unreasonable, unaffordable and unsustainable pension and retiree health care obligations for government employees. Connecticut must restructure such benefits in a fair manner using the sovereign powers of the state so they are competitive, affordable, sustainable and more secure. Failure to do so will result in additional pressure for increased taxes, reductions in education funding, municipal assistance, and infrastructure investment. It can also eventually result in a shredding of the state’s social safety net for those who are truly in need over time. These are all unacceptable outcomes that must be avoided.

Fourth, Connecticut has among the most, if not the most, generous welfare systems in the country. As a result, our state has become a magnet for individuals who rely on it. Connecticut’s current system is subject to significant waste and abuse, it discourages work and marriage, and it creates a cycle of multi-generational dependency. Our welfare system must be reformed to provide a sound and secure safety net for those who face temporary setbacks and those with serious long-term disabling challenges. At the same time, additional steps need to be taken to create additional job opportunities, enhance training programs and adopt reforms in order to provide a path forward for those who have been stuck in a cycle of poverty.

Last, you can’t have a great state if several of its largest cities are headed for bankruptcy and have non-competitive property taxes. We must provide mechanisms to restructure municipal finances outside of bankruptcy and promote economic development in our cities. Businesses, millennials and retirees want vibrant cities. They don’t have to be big but they must be safe, financially sound and have interesting things to do.

It’s not too late to save our ship of state, but it will take a professional problem solver with a proven track record of success to do it. Working together, we will succeed.

David M. Walker of Bridgeport is a Republican candidate for governor and former U.S. Comptroller General.


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Old 03-08-2018, 11:20 AM
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https://www.bloomberg.com/news/artic...he-muni-market

Quote:
If You're Fleeing Volatility, There's Refuge in the Muni Market
By
March 7, 2018, 2:29 PM EST
10-year yield has budged 0.01 percentage point in three weeks
Muni prices haven’t been this steady in nearly three years
Spoiler:
Quick: What are the most commonly used adjectives when describing the $3.8 trillion municipal-bond market?

If you said, "sleepy," or ”boring," you win.

Over the last three weeks, it has lived up to that reputation, with yields on 10-year AAA municipal bonds moving exactly one basis point, to 2.49 percent from 2.48 percent. The difference between the daily high and low yield over that period is nearly as minuscule -- a range of a mere 2.6 basis points, a difference that amounts to about $26 on a $100,000 investment. The price volatility over the past 20 days is the lowest since mid-2015, according to data compiled by Bloomberg.


Treasury yields haven’t moved much either since Valentines Day, just 3 basis points. But there’s been a 15 basis point difference between the three week high of 2.95 percent on Feb. 21 and the 2.81 percent low on March 1.

So why has trading municipal bonds become about as exciting as working as the Maytag repair man?


New offerings of long-term, fixed-rate state and local government debt is down 40 percent, compared with last year, because municipalities rushed to market in December before the federal tax overhaul sharply limited their ability to refinance debt. The issuance drought helped support the market amid the selloff in January triggered by speculation that the Fed will raise interest rates more aggressively than expected, leaving munis with a smaller loss than Treasuries so far this year.

“The lack of supply has kept the market from sort of falling off a cliff," said Nicholos Venditti, who oversees $11.5 billion of municipal bonds at Thornburg Investment Management in Santa Fe, New Mexico.

What’s more, retail investors, who drive the muni market, haven’t been spooked -- yet -- by the losses showing up in their month-end statements. Munis lost 1.5 percent through the end of February, their worst start to a year since the 2008, during the early pangs of the credit crisis.

The market may get more volatile as mom and pop investors start selling and signs emerge that banks and insurance companies are gradually paring tax-exempt bonds and buying taxable bonds instead because corporate tax cuts have made tax-exempt debt less attractive, Venditti said.

Add a pick-up in issuance by municipalities and that could lead to a bearish market, Venditti said, making his job -- and maybe yours -- more interesting.


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Old 03-08-2018, 03:35 PM
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Originally Posted by campbell View Post
I only have Close End Muni funds. I would describe them as anything but stable recently. They they are more like A rated on average. I've always been surprised how much more volatile their NAV's are than say a large ETF like MUB. The discount swings increases the volatile pricing a lot more (but also provide trading profits via swapping funds based on their discount movements).
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Old 03-08-2018, 04:19 PM
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Unfortunately for you, many closed end muni funds are chock full of puerto rican bonds.

and check out my puerto rico debt watch thread for that bit
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